What goes into a cap rate
Cap rate, short for capitalization rate, is a property's yearly net operating income divided by its price. It shows the return on an all-cash purchase.
Net operating income is a year of rent minus vacancy and operating costs. The mortgage stays out, so 2 buyers with different loans get the same cap rate on one house.
- Rent: a verified monthly rent times 12.
- Vacancy: the rent lost while the house sits empty. We use the 7.3% national rental vacancy rate for Q2 2026.
- Operating costs: property tax and insurance, plus maintenance, management and any HOA fee.
- Price: the list price, or the offer you plan to make.
A real example from a Homesage.ai report
We pulled 3 single-family houses for sale in Memphis, Tennessee, each with a verified rent. We call them House 1, House 2 and House 3.
All 3 are listed between $157,000 and $160,000, so the rent drives the difference. We applied the same costs to each house and left out the mortgage.
| Cap rate math, per year | House 1 | House 2 | House 3 |
|---|---|---|---|
| List price | $157,500 | $157,000 | $160,000 |
| Verified rent a month | $1,440 | $1,358 | $1,181 |
| Rent a year | $17,280 | $16,296 | $14,172 |
| Less vacancy at 7.3% | $1,261 | $1,190 | $1,035 |
| Less management at 10% of rent collected | $1,602 | $1,511 | $1,314 |
| Less property tax at 1.32% of price | $2,080 | $2,074 | $2,113 |
| Less insurance | $1,492 | $1,492 | $1,492 |
| Less maintenance at 1% of price | $1,575 | $1,570 | $1,600 |
| Net operating income | $9,270 | $8,459 | $6,618 |
| Cap rate, net operating income divided by price | 5.9% | 5.4% | 4.1% |
Verified rent here means the rent advertised on a recent rental listing for each house, checked in our listing data. No lease stands behind it.
House 1 keeps $9,270 of its $17,280 yearly rent once vacancy and costs come out. That is 54% of the rent. Divided by the $157,500 list price, it gives a cap rate of 5.9%.
House 1 rents for 0.91% of its price each month, close to the 1% rule. It still falls 1.3 points short of the national average. To reach 7.2% at that rent, you would pay about $135,750, which is $21,750 under the list price.
At their list prices, none of the 3 Memphis houses reaches the 7.2% national average for single-family rentals.
Our list of 7 signals of a good investment property uses a 6% cap rate as the bar. House 1 misses it by 0.1 point. Property tax is the largest yearly cost on all 3 houses.
How to calculate cap rate on a rental property
- Start with a year of rent. Take a verified monthly rent and multiply it by 12, as our guide to setting an asking rent explains.
- Take off vacancy. The US Census Bureau put the national rental vacancy rate at 7.3% in Q2 2026.
- Take off operating costs. Count property tax, insurance, maintenance and management. Add any HOA fee. SmartAsset puts management at 8% to 12% of the monthly rent.
- Leave out the mortgage. Loan payments belong in cash-on-cash return, which measures the return on the cash you put in.
- Divide by the price. Net operating income divided by the price is the cap rate. Compare it with the average for the same asset class to judge a good cap rate.
What sets a good cap rate in your market
The asset class sets the benchmark. Arbor's report puts US single-family rentals at 7.2% in Q2 2026, up from a low of 5.3% in Q4 2021. Single-family rentals also ran about 1.6 points above multifamily cap rates.
Interest rates set the floor. The 10-year Treasury yield averaged 4.4% in Q2 2026, and single-family rental cap rates sat 2.8 points above it. A cap rate near the Treasury yield pays you little for owning a house and finding tenants.
Local taxes move every result. Shelby County assesses homes at 25% of appraised value, and its 2026 county tax rate is $2.702382 per $100 of assessed value. Inside Memphis, the city's 2026 tax rate adds $2.58081, so tax comes to about 1.32% of value each year.
Insurance and maintenance come next. Tennessee's average homeowners premium was $1,492 in 2022, according to NAIC figures published by the Insurance Information Institute. American Family Insurance suggests setting aside 1% of the price each year for maintenance.
Common cap rate mistakes to avoid
- Skipping vacancy and management: Together they take $2,863 a year from House 1. Leave both out and its cap rate reads 7.7% instead of 5.9%, which puts it above the 7.2% national average.
- Counting only the county tax: Inside Memphis, the city rate adds $2.58081 per $100 of assessed value. Leave it out and the cap rate of House 1 reads 6.5% instead of 5.9%.
- Putting the mortgage in the cap rate: Loan payments change with each buyer's financing, so they belong in cash-on-cash return. Keep them out and you compare houses on the same terms.
- Taking one verified rent as certain: A verified rent comes from one rental listing, and the cap rate cannot see repairs the house needs. Check the rent against 3 to 5 similar rentals nearby and rerun the math with the repair cost.
Estimated values. Not investment advice. Data as of 2026-10-04.
Frequently asked questions
Is a 7.5% cap rate good?
Is 10% a good cap rate?
How do you calculate cap rate?
Does cap rate include the mortgage?
Does a higher cap rate always mean a better deal?
Ask Sage for verified rents
Sage, our assistant, finds houses with a verified rent in any US city from inside the AI tool you use. You then run the cap rate math on the ones that fit your price.
- Homesage.ai property search for 3 single-family houses in Memphis, TN on 2026-10-04. Cap rates are our calculation from the list prices and verified rents.
- Arbor Single-Family Rental Investment Trends Report Q3 2026, published 2026-09-15, with cap rate data from Chandan Economics.
- Shelby County Trustee, calculate taxes, 2026 county rate and the 25% residential assessment.
- Shelby County Trustee, City of Memphis tax rates, 2026 city rate.
- US Census Bureau housing vacancy report for Q2 2026, released 2026-07-28.
- SmartAsset, how much property managers charge, published 2022-07-07.
- Insurance Information Institute, homeowners and renters insurance facts, average premiums by state for 2022.
- American Family Insurance, how much to budget for home maintenance, updated 2021-06-22.
